Is the $1.4 Billion Powerball Lotto a Tax or a Dream?

If you haven’t already bought your lottery ticket for the largest prize in history and still thinking about it, here are your chances. The odds are currently standing at 1 in 292.2 million. Those odds make the 30 minutes you spend today dreaming about what you would do with your winnings seem like what it is, a fantasy. These numbers are thrown around often with comparisons to being eaten by a shark while struck by lightning before winning, but how reliable are they and do the probabilities change when the numbers get this high?

The fact that we’ve gotten to this point in the first place is against the odds. Last week, FiveThirtyEight estimated that there was a 77% chance that based on historical data, there was going to be at least one winner last Saturday (and it turned out to be on the 23% side of the probability). And now they’ve gone complete nerd salivating on the pot versus participation statistics:

…For lotto geeks like me, this is probably the most exciting lottery drawing in recent history! We’re going to get a ton of new data — namely, how many tickets get sold when a lottery jackpot is this high — that previously we could only extrapolate. Does the growth stay exponential? Are we underestimating or overestimating turnout? This might mean I’ll have to substantially recalibrate the model based on the new data, which is really cool. It’s the lottery equivalent of the New Horizons mission to Pluto: We’re going to get new data we’d only dreamed of, and even if that means we have to re-evaluate existing theories, it’s still very exciting.

The best-case scenario for me is that no one wins. This either means the model is right and we happen to have been in the 23 percent of cases where there isn’t a winner, or the model is dead wrong! Either way, the result is we might get that billion-dollar American lottery, and it would give us even more data about how Powerball behaves at the upper bound. There’s only a small chance this happens, but I’d be lying if I said I wasn’t kind of hoping for it.

Looking at the data of the probabilities is only the first part of what interests us about the Lottery. That’s because, it gives people the possibility of risking a little bit of money, with the potential of making big returns, something alternative investments formally call asymmetric return strategies. But while alternative investment strategies may like to risk a little to make a lot – the little to a lot ratio in the lottery is millions of times greater than it is in constructing an investment idea, where a successful asymetic return trade in a managed futures program would only be a factor of 10 or maybe 20 above the invested amount. Meaning, still in the realm of possibility.

The lottery, in comparison, is statistically outside the realm of possibility. It essentially doesn’t exist on a normal statistical distribution, just like the guy getting struck by lightning while being eaten by a shark hasn’t happened in the known history of mankind. Still, for those that only get in the game when the stakes are this high, there’s the dream of it being a real possibility, even if it has been argued that playing the lottery is a voluntary tax you choose to give to the government (via Freakonomics).

Powerball Lotto

But without people buying them up, the takeaway winnings wouldn’t be so big, so think of it as a socialized program (instead of a tax) where you’re opting to voluntarily give money to the government (technically – a bunch of state governments) and the government will reward one of you out of the hundreds of millions collected. It’s like a real time distribution of wealth, from essentially everyone who buys a ticket – to that man or woman being struck by lighting in the jaws of Jaws. And yet, you see people like this appear on TV giving bad advice.

Whether it’s a tax on bad math or a minuscule payment for that wonderful feeling of hope probably depends on your point of reference (and your numbers after the winning ticket is drawn). But whichever it is – there’s no denying the ($1.4 Billion and counting in tickets) popularity of it. Which makes us wonder, what would a global lottery look like? Talk about geometric ticket sales. Each pot would easily be over a billion, getting that much more world attention and pushing the pots up even higher – $10 Billion a week anyone? We could have all the trillions in world government debt paid off in no time!

P.S. – would you play the Reverse Lottery?

The philosopher in us can’t help but go through a little thought exercise here. Imagine playing the ‘reverse lottery’, where you would bring in a certificate for all of your assets (plus those of 10 generations after you) each day, and scratch off a piece of paper on which you are statistically certain of winning $2, but have a 1 in 292 million chance of losing everything you own (plus whatever your future generations will own). Would you play such a game? Most of us wouldn’t, even though the expected return is nearly the same.

P.P.S. – Check out John Oliver on Last Week Tonight from a while back – digging into the dirty underside of state lotteries all while making you laugh.